EXHIBIT 99
Risks and Uncertainties
We are subject to various risks that could have a negative effect on the
Company and its financial condition, many of which are beyond our control. As a
result of these and other factors, we may experience material fluctuations in
future operating results on a quarterly or annual basis, which could materially
and adversely affect our business, financial condition, operating results and
stock price. An investment in our stock involves various risks, including those
mentioned below and in our Annual Report on Form 10-K for the year ended
December 31, 2004 and those that are detailed from time to time in our other
filings with the Securities and Exchange Commission.
We are subject to risk inherent in owning and leasing real estate.
We are subject to varying degrees of risk generally related to leasing and
owning real estate many of which are beyond our control. In addition to general
risks related to owning properties used in the petroleum marketing industry,
risks include, among others, liability for long-term lease obligations, changes
in regional and local economic and real estate market conditions; changes in
supply of, or demand for rental properties similar to ours; competition for
tenants and changes in rental rates; our ability to relet properties on
favorable terms or at all; our ability to collect rent payments when due;
changes in interest rates and in the availability, cost and terms of financing;
the potential for uninsured casualty and other losses, the impact of present or
future environmental legislation and compliance with environmental laws; adverse
changes in zoning laws and other regulations; and acts of terrorism and war. In
addition, real estate investments are relatively illiquid, which means that our
ability to vary our portfolio of properties in response to changes in economic
and other conditions may be limited.
Our revenues are primarily dependent on the performance of Getty Petroleum
Marketing Inc., our primary tenant. Although we periodically receive and review
financial statements and other financial information from Marketing, some of the
information is not publicly available. We may not have sufficient information to
identify a deterioration of the financial performance or condition of Marketing,
or have sufficient time to advise our shareholders of such deterioration prior
to any default by Marketing on its monetary obligations to us that may result
from such deterioration. If Marketing does not fulfill its monetary obligations
to us, our financial condition and results of operations will be materially
adversely affected.
We rely upon the revenues from leasing retail motor fuel and convenience
store properties and petroleum distribution terminals, primarily to Marketing,
for substantially all of our revenues (88.9% for the nine months ended September
30, 2005). Accordingly, our revenues will be dependent to a large degree on the
economic performance of Marketing and of the petroleum marketing industry and
any factor that adversely affects Marketing or our other lessees may have a
material adverse effect on our financial condition and results of operations.
Marketing is wholly owned by a subsidiary of Lukoil, one of the largest
integrated Russian oil companies. In the event that Marketing cannot or will not
perform its monetary obligations under the Marketing Leases with us, our
financial condition and results of operations would be materially adversely
affected. Although Marketing is wholly owned by a subsidiary of Lukoil, no
assurance can be given that Lukoil will cause Marketing to fulfill any of its
obligations under the Marketing Leases.
We periodically receive and review Marketing's financial statements and
other financial data. We receive this information from Marketing pursuant to the
terms of the Master Lease. Certain of this information is not publicly available
and the terms of the Master Lease prohibit us from including this financial
information in our Annual Report on Form 10-K, our Quarterly Reports on Form
10-Q or in our Annual Report to Shareholders. The financial performance of
Marketing may deteriorate, and Marketing may ultimately default on its monetary
obligations to us before we receive financial information from Marketing that
would indicate the deterioration or before we would have the opportunity to
advise our shareholders of any increased risk of default. Additionally, any
financial data of Marketing that we are able to provide in our periodic reports
is derived from financial data provided by Marketing and neither we, nor our
auditors, have been involved with the preparation or review of such data.
As part of a periodic review by the Division of Corporation Finance of the
Securities and Exchange Commission ("SEC") of our Annual Report on Form 10-K for
the year ended December 31, 2003, we received and responded to a number of
comments. The only comment that remains unresolved pertains to the SEC's
position that we must include the financial statements and summarized financial
data of Marketing in our periodic filings. The SEC recently indicated that,
unless we file Marketing's financial statements and summarized financial data
with our periodic reports,: (i) it will not consider our Annual Reports on Forms
10-K for the years 2000 - 2004 to be compliant; (ii) it will not consider us to
be current in our reporting requirements; and (iii) it will not be in a position
to declare effective any registration statements we may file for public
offerings of our securities. We continue to dispute the SEC's position that
these financial statements and summarized financial data of Marketing are
required. We do not believe that we have a material liability for
offers and sales of our securities made pursuant to registration statements that
did not contain the financial statements or summarized financial data of
Marketing. We cannot accurately predict the consequences if we are
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ultimately unsuccessful in our position that the financial statements and
summarized financial data of Marketing are not required.
Certain financial and other information concerning Marketing is available
from Dun & Bradstreet and may be accessed by their web site (www.dnbsearch.com)
upon payment of their fee.
If Marketing does not fulfill its monetary obligations to us under the
Marketing Leases, our financial condition and results of operations will be
materially adversely affected. Based on our review of the financial statements
and other financial data Marketing has provided to us to date, we believe that
Marketing has the liquidity and financial ability to continue to pay timely its
monetary obligations to us under the Marketing Leases, as it has since the
inception of the Master Lease in 1997.
Marketing's earnings and cash flow from operations depend upon rental
income from its tenants and the sale of refined petroleum products at margins in
excess of its fixed and variable expenses. A large, rapid increase in wholesale
petroleum prices would adversely affect Marketing's profitability and cash flow
if the increased cost of petroleum products could not be passed on to
Marketing's customers or if automobile consumption of gasoline were to
significantly decline. Petroleum products are commodities whose prices depend on
numerous factors that affect the supply of and demand for petroleum products.
The prices paid by Marketing and other petroleum marketers for products are
affected by global, national and regional factors. We cannot be certain how
these factors will affect petroleum product prices or supply in the future, or
how in particular they will affect Marketing or our other tenants. We believe
that Marketing currently relies on various suppliers for the purchase of refined
petroleum products.
Substantially all of our tenants depend on the same industries for their
revenues.
We derive substantially all of our revenue from leasing, primarily on a
triple-net basis, retail motor fuel and convenience store properties and
petroleum distribution terminals to tenants in the petroleum marketing industry.
Accordingly, our revenues will be dependent on the economic success of the
petroleum marketing industry, and any factors that adversely affect that
industry could also have a material adverse effect on our financial condition
and results of operations. The success of participants in that industry depends
upon the sale of refined petroleum products at margins in excess of fixed and
variable expenses. A large, rapid increase in wholesale petroleum prices would
adversely affect the profitability and cash flows of Marketing and our other
tenants if the increased cost of petroleum products could not be passed on to
their customers or if automobile consumption of gasoline were to significantly
decline. Petroleum products are commodities whose prices depend on numerous
factors that affect the supply of and demand for petroleum products. The prices
paid by Marketing and other petroleum marketers for products are affected by
global, national and regional factors. We cannot be certain how these factors
will affect petroleum product prices or supply in the future, or how in
particular they will affect Marketing or our other tenants. We believe that
Marketing currently relies on various suppliers for the purchase of refined
petroleum products.
Property taxes on our properties may increase without notice.
Each of our owned properties is subject to real property taxes. The real
property taxes on our properties and any other properties that we develop or
acquire in the future may increase as property tax rates change and as those
properties are assessed or reassessed by tax authorities. To the extent that our
tenants are unable or unwilling to pay such increase in accordance with their
leases, our net operating expenses may increase.
Compliance with environmental regulations may be costly.
The real estate business and the petroleum products industry are subject to
numerous federal, state and local laws and regulations, including matters
relating to the protection of the environment. Under certain environmental laws,
a current or previous owner or operator of real estate may be liable for
contamination resulting from the presence or discharge of hazardous or toxic
substances or petroleum products at, on or under such property, and may be
required to investigate and clean-up such contamination. Such laws typically
impose liability and clean-up responsibility without regard to whether the owner
or operator knew of or caused the presence of the contaminants, or the timing or
cause of the contamination, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. For example, liability may
arise as a result of the historical use of a property or from the migration of
contamination from adjacent or nearby properties. Any such contamination or
liability may also reduce the value of the property. In addition, the owner or
operator of a property may be subject to claims by third parties based on
injury, damage and/or costs, including investigation and clean-up costs,
resulting from environmental contamination present at or emanating from a
property. The properties owned or controlled by us are leased primarily as
retail motor fuel and convenience store properties, and therefore may contain,
or may have contained, underground storage tanks for the storage of petroleum
products and other hazardous or toxic substances, which creates a potential for
the release of such products or substances. Some of the properties may be
adjacent to or near properties that have contained or currently contain
underground storage tanks used to store petroleum products or other hazardous or
toxic substances. In addition, certain of the properties are on, adjacent to or
near properties upon which others
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have engaged or may in the future engage in activities that may release
petroleum products or other hazardous or toxic substances. There may be other
environmental problems associated with our properties of which we are unaware.
These problems may make it more difficult for us to relet or sell our properties
on favorable terms or at all.
We have agreed to provide limited environmental indemnification, capped at
$4.25 million and expiring in 2010, to Marketing for certain pre-existing
conditions at six of the terminals we own and lease to Marketing. Under the
agreement, Marketing will pay the first $1.5 million of costs and expenses
incurred in connection with remediating any such pre-existing conditions,
Marketing will share equally with us the next $8.5 million of those costs and
expenses and Marketing will pay all additional costs and expenses over $10.0
million. We have not accrued a liability in connection with this indemnification
agreement since it is uncertain that any amounts will be required to be paid
under the agreement.
As of September 30, 2005 we had accrued $19.4 million as management's best
estimate of the fair value of reasonably estimable environmental remediation
costs and we had also recorded $4.9 million as management's best estimate for
recoveries from state UST remediation funds, net of allowance, related to
environmental obligations and liabilities. Environmental expenditures were $3.5
million and recoveries from underground storage tank funds were $1.5 million for
the nine months ended September 30, 2005. For the nine months ended September
30, 2005, net changes in estimated remediation costs and accretion expense
included in our consolidated statements of operations amounted to $1.4 million,
which was net of probable recoveries from state UST remediation funds. We
currently estimate that our net environmental spending will be approximately
$5.0 million during 2005. Our business plan for 2005 currently projects a net
change in estimated remediation costs and accretion expense of approximately
$3.6 million.
In view of the uncertainties associated with environmental expenditures,
however, we believe it is possible that the fair value of future actual net
expenditures could be substantially higher than these estimates. Adjustments to
accrued liabilities for environmental remediation costs will be reflected in our
financial statements as they become probable and a reasonable estimate of fair
value can be made. Although future environmental costs may have a significant
impact on results of operations for any single fiscal year or interim period, we
believe that such costs will not have a material adverse effect on our long-term
financial position.
We cannot predict what environmental legislation or regulations may be
enacted in the future, or how existing laws or regulations will be administered
or interpreted with respect to products or activities to which they have not
previously been applied. We cannot predict whether state underground storage
tank fund programs will be administered and funded in the future in a manner
that is consistent with past practices or whether future environmental spending
will continue to be eligible for reimbursement under these programs. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of the regulatory agencies or stricter interpretation of existing laws
which may develop in the future, could have an adverse effect on our financial
position, or that of our tenants, and could require substantial additional
expenditures for future remediation.
For additional information with respect to environmental remediation costs
and estimates see "Environmental Matters" in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" which appears in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004
and note 5 to our consolidated financial statements in our Annual Report to
Shareholders filed as exhibit 13 in such Form 10-K, and "Environmental Matters"
in "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appears in this Quarterly Report on Form 10-Q, and
the accompanying consolidated financial statements and related notes which
appear in this Form 10-Q (including note 5).
We are defending pending lawsuits and claims and are subject to material losses.
We are subject to various lawsuits and claims, including litigation related
to environmental matters, damages resulting from leaking UST and toxic tort
claims. The ultimate resolution of certain matters cannot be predicted because
considerable uncertainty exists both in terms of the probability of loss and the
estimate of such loss. Our ultimate liabilities resulting from such lawsuits and
claims, if any, may be material to our results of operations in the period in
which they are recognized.
Our properties are concentrated in the Northeast United States, and adverse
conditions in that region, in particular, could negatively impact our
operations.
A significant portion of the properties we own and lease are located in the
Northeast United States. Because of the concentration of our properties in that
region, in the event of adverse economic conditions in that region, we would
likely experience higher risk of default on payment of rent payable to us
(including under the Marketing Leases) than if our properties were more
geographically diversified. Additionally, the rents on our properties may be
subject to a greater risk of default than other properties in the event of
adverse economic, political, or business developments or natural hazards that
may affect the
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Northeast United States and the ability of our lessees to make rent payments. In
the event of any natural disaster, our ability to pay dividends could be
adversely affected.
We are in a competitive business.
The real estate industry is highly competitive. Where we own properties, we
compete for tenants with a large number of real estate property owners and other
companies that sublet properties. Our principal means of competition are rents
charged in relation to the income producing potential of the location. In
addition, we expect other major real estate investors, some with much greater
resources, will compete with us for attractive acquisition opportunities. These
competitors include petroleum manufacturing, distributing and marketing
companies, other REITs, investment banking firms and private institutional
investors. This competition has increased prices for commercial properties and
may impair our ability to make suitable property acquisitions on favorable terms
in the future.
Our future cash flow is dependent on renewal of leases and reletting of our
space.
We are subject to risks that financial distress of our tenants may lead to
vacancies at our properties, that leases may not be renewed, that locations may
not be relet or that the terms of renewal or reletting (including the cost of
required renovations) may be less favorable than current lease terms. In
addition, numerous properties compete with our properties in attracting tenants
to lease space. The number of competitive properties in a particular area could
have a material adverse effect on our ability to lease our properties or newly
acquired properties and on the rents charged. If we were unable to promptly
relet or renew the leases for all or a substantial portion of these locations,
or if the rental rates upon such renewal or reletting were significantly lower
than expected, our cash flow could be adversely affected and the resale values
or our properties could decline. The Marketing Leases have an initial term
expiring in December 2015, and generally provide Marketing with three renewal
options of ten years each and a final renewal option of three years and ten
months extending to 2049. Each of the renewal options may be exercised only on
an "all or nothing" basis.
We may acquire or develop new properties, and this may create risks.
We may acquire or develop properties or acquire other real estate companies
when we believe that an acquisition or development matches our business
strategies. We may not succeed in consummating desired acquisitions or in
completing developments on time or within our budget. We also may not succeed in
leasing newly developed or acquired properties at rents sufficient to cover
their costs of acquisition or development and operations.
We are subject to losses that may not be covered by insurance.
Marketing, and other tenants, as the lessee of our properties, are required
to provide insurance for such properties, including casualty, liability, fire
and extended coverage in amounts and on other terms as set forth in our master
leases. We carry insurance against certain risks and in such amounts as we
believe are customary for businesses of our kind. However, as the costs and
availability of insurance change, we may decide not to be covered against
certain losses (such as certain environmental liabilities, earthquakes,
hurricanes, floods and civil disorders) where, in the judgment of management,
the insurance is not warranted due to cost or availability of coverage or the
remoteness of perceived risk. There is no assurance that our insurance against
loss will be sufficient. The destruction of, or significant damage to, or
significant liabilities arising out of conditions at our properties due to an
uninsured cause would result in an economic loss and could result in us losing
both our investment in, and anticipated profits from, such properties. When a
loss is insured, the coverage may be insufficient in amount or duration, or a
lessee's customers may be lost, such that the lessee cannot resume its business
after the loss at prior levels or at all, resulting in reduced rent or a default
under its lease. Any such loss relating to a large number of properties could
have a material adverse effect on our financial condition.
Failure to qualify as a REIT would have adverse consequences to our
shareholders.
We elected to be taxed as a REIT beginning January 1, 2001. We cannot,
however, guarantee that we will continue to qualify in the future as a REIT. In
order to initially qualify for REIT status, we were required, among other items,
to make a distribution to shareholders in an amount at least equal to our
accumulated "earnings and profits" (as defined by the Internal Revenue Code)
from the years we operated as a taxable corporation. On August 1, 2001, we paid
the earnings and profits distribution to our shareholders in an amount that we
estimated was required in order for us to qualify as a REIT. Determination of
accumulated earnings and profits for federal income tax purposes is extremely
complex. Should the Internal Revenue Service successfully assert that our
accumulated earnings and profits were greater than the amount distributed, we
may fail to qualify as a REIT; however, we may avoid losing our REIT status by
paying a deficiency dividend to eliminate any remaining accumulated earnings and
profits. We may have to borrow money or sell assets to pay such a deficiency
dividend. We cannot give any assurance that new legislation, regulations,
administrative interpretations or court decisions will not significantly change
the requirements relating to our qualification. If we fail to qualify as a REIT,
we will again be subject to federal income tax at regular corporate rates, and
could be subject to the federal alternative minimum tax, we would be required to
pay significant income
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taxes and would have less money available for our operations and distributions
to shareholders. This would likely have a significant adverse effect on the
value of our securities. We could also be precluded from treatment as a REIT for
four taxable years following the year in which we lost the qualification, and
all distributions to stockholders would be taxable as regular corporate
dividends to the extent or our current and accumulated earnings and profits.
As a REIT, we are dependent on external sources of capital which may not be
available on favorable terms.
To maintain our status as a REIT, we must distribute to our shareholders
each year at least ninety percent of our net taxable income, excluding any net
capital gain. Because of these distribution requirements, it is not likely that
we will be able to fund all future capital needs, including acquisitions, from
income from operations. Therefore, we will have to rely on third-party sources
of capital, which may or may not be available on favorable terms or at all.
Moreover, additional equity offerings may result in substantial dilution of
shareholders' interests, and additional debt financing may substantially
increase our leverage. Our access to third-party sources of capital depends upon
a number of factors, including general market conditions, the market's
perception of our growth potential, our current and potential future earnings
and cash distributions and the market price of our common stock.
The loss of certain members of our management team could adversely affect our
business.
We depend upon the skills and experience of our executive officers. Loss of
the services of any of them could have a material adverse effect on our business
and financial condition. We do not have employment agreements with any of our
executives.
Our business operations may not generate sufficient cash for distributions or
debt service.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us in an amount
sufficient to enable us to make distributions on our common stock, to pay our
indebtedness, or to fund our other liquidity needs. We may not be able to repay
or refinance existing indebtedness on favorable terms, which could force us to
dispose of properties on disadvantageous terms (which may also result in losses)
or accept financing on unfavorable terms.
Our ability to meet the financial and other covenants relating to our
Credit Agreement may be dependent on the performance of our tenants. Failure to
comply with these covenants could result in an event of default that, if not
cured or waived, could result in the acceleration of all or a substantial
portion of our indebtedness under our Credit Agreement.
We may be unable to pay dividends and our equity may not appreciate.
Under the Maryland General Corporation Law, our ability to pay dividends
would be restricted if, after payment of the dividend, (1) we would not be able
to pay indebtedness as it becomes due in the usual course of business or (2) our
total assets would be less than the sum of our liabilities plus the amount that
would be needed, if we were to be dissolved, to satisfy the rights of any
shareholders with liquidation preferences. There currently are no shareholders
with liquidation preferences. No assurance can be given that our financial
performance in the future will permit our payment of any dividends. As a result
of the factors described above, we may experience material fluctuations in
future operating results on a quarterly or annual basis, which could materially
and adversely affect our business, stock price and ability to pay dividends.
Terrorist attacks and other acts of violence or war may affect the market, on
which our common stock trades, the markets in which we operate, our operations
and our results of operations.
Terrorist attacks or armed conflicts could affect our business or the
businesses of our tenants or of Marketing or its parent. The consequences of
armed conflicts are unpredictable, and we may not be able to foresee events that
could have an adverse effect on our business. More generally, any of these
events could cause consumer confidence and spending to decrease or result in
increased volatility in the U.S. and worldwide financial markets and economy.
They also could be a factor resulting in, or a continuation of, an economic
recession in the U.S. or abroad. Any of these occurrences could have a
significant adverse impact on our operating results and revenues and may result
in volatility of the market price for our common stock.
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